Top 5 Finance List
(originally posted to massnonprofitnet.org Fall 2020)
People don’t get involved in nonprofits because they love finance! It’s about the mission right? But Executive Directors and Board members still hold fiduciary responsibility to ensure that resources are managed, protected and used well. Here is my list of the questions you should ask about five key financial reports.
1. Balance Sheet: The easiest number to understand is the cash balances, right? But what’s the right amount for your organization? A simple test: Divide your annual expense budget by 12. Divide your cash balances by that number. The result is the value of the months’ cash on hand. Is it under 6 months? That may be a concern. Look back to last year to observe cash fluctuations. This is your short term insurance against unforeseen events.
2. Operating (P&L) Statement: Income. Understand where your revenues come from. Compared to last year, are you seeing a similar pattern of, for example, 50% donations and 50% grants? How likely are you to get the same grants every year? If there is a concentration in one area, how reliable is that year to year? I worked with one organization that depended on their annual Gala for over 70% of their annual revenue. Not good, especially when a pandemic forces the event’s cancellation.
3. Operating (P&L) Statement: Expenses. As a leader of the organization, get comfortable with the general mix of expenses. Most nonprofits reflect a people-heavy budget: 70% in personnel and related costs isn’t terribly unusual—so don’t freak out. If you’re used to a commercial business, it may look odd, but it’s okay.
4. Cash Flow: For many nonprofits that don’t have a cash reserve, this is the most critical report, and you may not even get one. Based on the income mix, are there certain months that are flush with cash (often December with year end appeals, for example)? Are there tight months (often summer) where expenses continue but revenue does not? Ask to see a monthly summary, from the previous year or two. Is that cash balance calculated above enough to get you through tight months?
5. Budget: Most nonprofits have and vote on an annual budget. But remember, this is your roadmap to meeting your mission: no resources = no growth. If your organization wants to start a new program, is now the time if you’ve had losses in the last two years? Are new funding sources available? Will you have the cash or need a line of credit? These are the questions to consider, not just “do we break even”.
A PS about your annual audit—this isn’t just a requirement, it’s a terrific opportunity to get a independent assessment of your financial operations. Whether a review or full audit, two key suggestions: make sure the Board meets with the auditors without staff present, for a frank conversation. And I suggest changing audit firms at least every five years, especially if your staff stays the same.
A final word about all this in the time of COVID. When it comes to finance, the key concern should be separation of duties. Talk to your auditors for suggestions. If only one person is opening and depositing donations, are you finding other ways to protect your organization’s gifts? Scanning and recording all documentation is critical. This protects everyone involved.